Wednesday, 8 October 2008

Wake Up Call

I never thought that I will ever write this.

The fact of the matter is that we have to start acting on it now. I am sure you must have heard about The Great Depression of 1929. It all started around 1920, and was at its peak during 1933. This was one of the prime reasons of the World War II. Don't panic yet, but you'll. During that time the world was engulfed in unemployment and chaos. Things were so cheap, but there was no money to buy.

It started in the United States then and it has started again in United States. The great economic boom of 1920 gave in to the great depression then, and the great economic boom of all economies and so called "emerging economies" may again lead to depression. Obviously enough the world is in recession now. That time it was triggered by debt and reasonably enough this time its also triggered by debt. This time however we have a funky two letter crisis-word: Sub-prime Crisis.

You will be amazed to see the striking similarity between what happened then and whats happening now. The ambiance might have changed but the process is same. The only silver lining in dark cloud is that this time they have a reference book that suggests what-not-to-do. The biggest flaw that time was impotence of the Fed. It just didn't do anything. Although this time they are planning a bail-out, but it remains to be seen how effective it turns out to be. As per an estimate more than $300 billion has been written off by various banks in sub-prime crisis. But, that's just it - an estimate. It reported pretty much as casualties are reported in a terrorist attack - deflated.

You know its coming when you see huge umbrellas striping. Banks started to fail then, and they have started to fail again. Then about 744 banks were busted, now 3 are done - and counting! Its a domino effect. The big ones fall, then the smaller ones, then industrial production is effected - to a halt, and then the middle class is rendered jobless. Nothing has changed. It happened in the same fashion then and its going the same route all over again.

I don't know if you have heard this or not - a house in US was sold for about $1.76 only. That's about INR 82. In India, it appears that the property prices are declining to go down, but its just that - a bubble. They don't come down, they defy gravity, and they burst. With the lending rate going higher, and inflation firmly in place, the bubble has got its days numbered. If you think that the flat you bought 2 years ago will give you a 100% return on investment then you must be living on an island. Go, and try to sell it, you'll get to know what I am talking about. You'll struggle to get the principal.

You must have noticed the nosedive of Equities market. Why doesn't there seem to be an end to the free fall of Stock exchanges all over the world. All the banks are heavily into stocks and related instruments. People then didn't keep any money in banks, because of the fear of losing it altogether.

Banks lend money to each other at an interest rate function of Libor/Euribor/Mibor. We call it money market. Money is lent for a period of 1 day to 1 year. The interest rate is currently at about 5+%, easily an all time high. Banks fear of counter-party risk. There is very tight liquidity, hence the bail-out. That's the reason why the RBI eased off the CRR yesterday by about 50 basis points. This measure is to ease liquidity, so that there is money in the market. The other way to increase liquidity is to buy government bonds - RBI does it, so that money is injected into the system. US Fed didn't do it in 1929, this is happening now - hopefully a good sign.

Its time to talk to your father, and ask him why he always kept you from going under debt, from taking any loans, but you didn't realise. You thought that you get salary in astronomical figures, nothing can ever go wrong. People all over US, and Europe and "emerging economies" thought the same. You used to get cheap credit, but no longer. The damage has already been done. That time, people couldn't repay their debts as the companies/factories where they used to work were busted, because banks were busted. We have seen the fate of a lot of banks in US already. We are following the same f**king pattern, all the f**king over again.

This time they had devised a "Sub-prime customer" to lend money at higher interest rate, hoping to reap a rich crop. Rest is history. That's one of the differences between 1929 and 2008. And the difference is huge. Prime borrowers became sub-prime and the latter went bankrupt. Debt is taking its toll.

I have known myself as the biggest optimist who ever walked the face of this planet; but no longer! I can't keep my eyes closed. I have started to sense the inevitable. Its shocking!